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Understanding Plastic Ban In India And Worldwide: Part-I

Environment

As per United Nations Environmental Programme (UNEP), plastic pollution soared from two million tonnes in 1950, to 348 million tonnes in 2017, becoming a global industry valued at $522.6 billion.[1] It is expected to double in capacity, by 2040. Recently, during historic resolution at the UN Environment Assembly in Nairobi on 02.03.2022 to end plastic pollution, Norway’s Minister for Climate and the Environment, Espen Barth Eide lamented, “Plastic pollution has grown into an epidemic.”

This man-made situation is undeniably grave.

Tangible steps have been taken around the world to phase out the use of plastics. Countries after countries have realized that the problem will soon turn fatal. Bangladesh was the first country to realize the magnitude of the problem and immediately imposed ban on plastics in 2002, when the plastics were found to be the reasons for choking of drains and consequential drastic flooding in the country. There is specific checking of luggage for plastics in countries like Rwanda at the airport when the passenger arrives.

India has recently followed the league by systematically and methodically working on the same for the last one decade and more significantly since 2016. Hon’ble Prime Minister Modi while recently addressing the United Nations Conference on Desertification said, “I think the time has come for the world to say goodbye to single-use plastics…” Effective July 1, 2022, India imposed complete ban on identified items made of single-use plastic.

Plastic: The Frankenstein

Plastic is a long chain of synthetic polymers/carbon atoms arranged in repeating units. They are often much longer than those found in nature. This gives it the characteristic strength and flexibility along with light weight. This strength, however, is also the reason that the plastics don’t break down when left alone in the environment. Polymers are naturally present – cellulose being most common of all. Man started producing plastics firstly from these natural polymers and then moved to using carbon atoms from petroleum and other fossil fuels.

As per Directive (EU) 2019/904, ‘plastic’ means “a material consisting of a polymer to which additives or other substances may have been added, and which can function as a main structural component of final products, with the exception of natural polymers that have not been chemically modified.”

As per Rule 3(o) of the Plastic Waste Management Rules, 2016, “plastic” means material which contains as an essential ingredient a high polymer such as polyethylene terephthalate, high density polyethylene, Vinyl, low density polyethylene, polypropylene, polystyrene resins, multi-materials like acrylonitrile butadiene styrene, polyphenylene oxide, polycarbonate, Polybutylene terephthalate.

Plastics have been categorized into seven types as per the method they would be recycled.[2] They are depicted in numbers inside the three arrow triangle recycling symbol. This number is a reference to what type of plastic the container is made of. The category can be checked from the bottom of the plastic container or carry bag. The recycling numbers aid recyclers in the sorting process. All plastics may look alike but they are not. They are made of different molecules or set of molecules which do not mix. Therefore, sorting the plastics before recycling is essential. The recycling code constitutes of the numbers 1 through 7 – PET-Polyethylene terephthalate (eg. Water bottles, dispensing containers, biscuit trays), HDPE-High density polyethylene (eg. Shampoo bottles, milk bottles, freezer bags, ice cream containers), V-Vinyl (PVC) (eg. Blister packaging, wire jacketing, siding, windows, piping), LDPE– Low density polyethylene (eg. Bags, trays, containers, food packaging film), PP-Polypropylene (eg. Potato chip bags, microwave dishes, ice cream tubs, bottle caps, single-use face masks), PS-Polystyrene and Other means all other resins and multi-materials like ABS (Acrylonitrile butadiene styrene) (eg. Cutlery, plates, cups), PPO (Polyphenylene oxide), PC (Polycarbonate), PBT (Polybutylene terephalate) (eg. Three- and five-gallon water bottles, bullet-proof materials, sunglasses, DVDs, iPod and computer cases, signs and displays, certain food containers, nylon) etc.[3]

The most widely accepted plastics for recycling are number 1 and 2.

Who made Frankenstein?

John Wesley Hyatt made the first synthetic polymer by treating cellulose, derived from cotton fiber, with camphor. This was used as a substitute to ivory and was considered a blessing as it saved brutal elephant killings. Bakelite was the first fully synthetic plastic invented by Leo Baekeland in 1907. As per United Nations Environmental Programme, Polyethylene, the most commonly used plastic, was created by accident at a chemical plant in Northwich, England in 1933. In 1965, one-piece polyethylene shopping bag, designed by engineer Sten Gustaf Thulin, was patented by the Swedish company Celloplast.

It was not until the World War-II that the demand for plastics and for the item made out of it exponentially increased and finally steeply rose in 1970s.[4] Since the 1950s, 8.3 billion metric tons of plastics have been produced, and half of that in the past 15 years alone.[5] As per UNEP, worldwide, one million plastic bags were consumed every minute in 2011.

What is single use plastic?

Any plastic that is made from polymers of HDPE, LDPE, PET, PS, PP, EPS is single use plastic. Natural Resources Defense Council (NRDC), a non-profit organization founded in US in 1970 defines ‘single use plastic’ as “goods that are made primarily from fossil fuel–based chemicals (petrochemicals) and are meant to be disposed of right after use—often, in mere minutes”.

As per Directive (EU) 2019/904 ‘single-use plastic product’ means “a product that is made wholly or partly from plastic and that is not conceived, designed or placed on the market to accomplish, within its life span, multiple trips or rotations by being returned to a producer for refill or re-used for the same purpose for which it was conceived.”

The term ‘single-use plastic’ was not defined under the 2016 rules when the rules were introduced. Vide Plastic Waste Management (Amendment) Rules, 2021, notified by the Ministry on 12.08.2021, a definition of ‘Single-use plastic commodity’ was introduced under sub-rule (va) of Rule 3. It means “a plastic item intended to be used once for the same purpose before being disposed of or recycled.”

Single-use plastics are most commonly used for packaging, plastic bags, and serviceware, such as bottles, stirrers, clamshells, wrappers, straws, and bags.

[1] https://news.un.org/en/story/2022/03/1113142

[2] Rule 11(2) of 2016 Rules.

[3] For details and understanding please visit https://www.unep.org/interactives/beat-plastic-pollution/

[4] https://www.unep.org/news-and-stories/story/birth-ban-history-plastic-shopping-bag#:~:text=2002%20%E2%80%93%20Bangladesh%20is%20the%20first,drainage%20systems%20during%20disastrous%20flooding.

[5] https://www.nrdc.org/stories/single-use-plastics-101#what

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Recovery Certificate would Qualify as a “Financial Debt” under the Insolvency and Bankruptcy Code, 2016 and Give Rise to a Fresh Cause of Action

Insolvency and Bankruptcy

In a recent judgment in Kotak Mahindra Bank Limited versus A. Balakrishnan & Anr [Civil Appeal No. 689 of 2021], the Hon’ble Supreme Court settled the position w.r.t. the holder of recovery certificate issued under the Recovery of Debts and Bankruptcy Act, 1992 (“RDB Act”) who shall be a ‘Financial Creditor’ under Insolvency and Bankruptcy Code, 2016 (“IBC/Code”) and shall have a fresh cause of action to initiate CIRP under section 7 of the Code.

In the present matter, Kotak Mahindra Bank, which procured a recovery certificate from Debt Recovery Tribunal, filed an application under section 7 of the Code on the basis of the recovery certificate. The application was admitted but immediately challenged before the Hon’ble NCLAT which set aside the order of the NCLT on the basis of the cause of action being time barred.

The order of NCLAT was challenged before the Hon’ble Supreme Court on the ground that the application before NCLT was made well within the period of three years from the date on which the recovery certificates were issued and therefore the application under section 7 was within limitation.

The Court set aside the order of NCLAT. The Court upheld the decision in Dena Bank (now Bank of Baroda) vs. C. Shivakumar Reddy & Anr, 2021 SCC OnLine SC 543 which inter alia held that the a fresh period of limitation period would accrue for an application under Section 7 from the date of a recovery certificate. The Court reasoned that a recovery certificate is a “financial debt” within the unexhausted definition provided under Section 5 (8) of the Code. While an application under section 7 of the IBC may be filed in respect of a ‘default’ which means non-payment of a debt as per section 3 (12) of the Code, “debt” is defined as a “liability in respect of a claim as per Section 3 (11) of the Code, and “claim” in turn, as per section 3(6) of the IBC, means a right to payment, whether or not such right has been reduced to judgment. In this case, the claim has been reduced to judgment by way of a recovery certificate. The Court also went into interpreting Sections 19 (22) and 19 (22A) of the RDB Act and held that they do not restrict initiation of CIRP based on a recovery certificate.

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HOW TO REVOKE/CANCEL A POWER OF ATTORNEY

CommonMan, Specific Contracts

A power of attorney is an instrument which is a creature of contract of agency executed between two or more parties authorising the agent to act in on behalf of the principal(s) and act for the benefit of the principal(s). It is called “a document of convenience”[1]. Any act done or document executed by the agent under the strength of power of attorney will be deemed to be the act of or execution by the principal.[2]

A power of attorney (“PoA”) may be revocable or irrevocable[3]. Moreover, a PoA may be general or for a specific purpose. Interestingly, a deed of power of attorney does not require consideration. As per section 185 of the Indian Contract Act, 1872, no consideration is necessary to create an agency. PoA is therefore, an exception to sections 10 r/w 23 of the Contract Act which provides that consideration is an essential ingredient of a lawful agreement.

The law regarding power of attorney (“PoA”) is primarily governed by Power of Attorney Act, 1882 (“1882 Act”) and the Indian Contract Act, 1872 (“Contract Act”).  The Stamp Act, 1899 and Registration Act, 1908 also make provisions for the stamping and registration of the instrument.

The Law

The PoA is defined under section 1A of the 1882 Act. According to section 1A, “power-of-attorney” includes any instrument empowering a specified person to act for and in the name of the person executing it.” Section 2(21) the Indian Stamp Act, 1899 also defines the term. It is further governed by Chapter X of the Contract Act where Section 182 of the Contract Act defines ‘agent’. Chapter X is on contract of agency, the effect of it and its termination.

The effect of execution of power of attorney has been succinctly captured under section 2 of the 1882 Act which has been reproduced herein below:

2. Execution under power-of-attorney.—The donee of a power-of-attorney may, if he thinks fit, execute or do any instrument or thing in and with his own name and signature, and his own seal, where sealing is required, by the authority of the donor of the power; and every instrument and thing so executed and done, shall be as effectual in law as if it had been executed or done by the donee of the power in the name, and with the signature and seal, of the donor thereof. This section applies to powers-of-attorney created by instruments executed either before or after this Act comes into force.

Section 4 of the 1882 Act lays down a few requirements for the instrument to be sufficient evidence. As per section 4 of the 1882 Act, it must be supported by an affidavit, statutory declaration or other sufficient evidence which shall be deposited in the High Court/District Court and another set must be maintained for inspection by any person. The copy so deposited may be stamped or marked as a certified copy, and, when so stamped or marked, shall become a certified copy which shall be sufficient evidence of the contents of the instrument and of the deposit thereof in the High Court or District Court, without further proof. The relevant provision of 1882 Act is reiterated herein below:

4. Deposit of original instruments creating powers-of-attorney.— (a) An instrument creating a power-of-attorney, its execution being verified by affidavit, statutory declaration or other sufficient evidence, may, with the affidavit or declaration, if any, be deposited in the High Court 9 [or District Court] within the local limits of whose jurisdiction the instrument may be.

(b) A separate file of instruments so deposited shall be kept; and any person May search that file, and inspect every instrument so deposited; and a certified copy thereof shall be delivered out to him on request.

(c) A copy of an instrument so deposited may be presented at the office and may be stamped or marked as a certified copy, and, when so stamped or marked, shall become and be a certified copy.

(d) A certified copy of an instrument so deposited shall, without further proof, be sufficient evidence of the contents of the instrument and of the deposit thereof in the High Court 1 [or District Court].

(e) The High Court may, from time to time, make rules for the purposes of this section, and prescribing, with the concurrence of the State Government, the fees to be taken under clauses (a), (b) and (c).

g) This section applies to instruments creating powers-of-attorney executed either before or after this Act comes into force.

In practice, the power of attorney is executed in front of two witnesses and a notary public. Notarisation has the effect of registration. This shall essentially change if it is a special power of attorney executed say, for sale of property. Registration shall become mandatory in such cases and the parties will also be liable to pay the stamp duty as per Article 48 of the Schedule of the Stamp Act. As per the judgments of the Apex Court, a PoA is strictly construed.[4] Therefore, a deed of power of attorney needs to be very carefully worded. If it a PoA for sale of property, the power should also expressly authorise the power to agent to execute the sale deed and must include power to present the document before the Registrar and to admit execution of the document before the Registrar. 

Revocation or termination of power of attorney

As per the Contract Act, agency can be revoked by either the principal or the agent. The revocation may be expressed or implied by conduct. Such contract of agency will get automatically revoked on death of principal or agent or them becoming of unsound mind. Additionally, it is revoked by operation of law on principal being adjudicated insolvent. The only exception to it is in case where agent has an interest in subject matter of agency. As per section 202 of the Contract Act, the agency cannot be revoked to the prejudice of such interest. Further, the agency can be revoked at any time before the authority has been exercised. However, if an agency is to continue for any period of time, the party prematurely revoking the agency, without any sufficient cause, must compensate the other.

The termination or revocation of the agency may or may not immediately come into effect. Section 208 of the Contract Act stipulates that the termination of the authority of the agent will take effect only when it becomes known to the agent. Similarly, it will take effect as regards the third party when it becomes known to the third party.

These provisions equally apply in case of a PoA. The party, however, has to follow a procedure. For an express revocation, the party is required to issue a notice to the other party stating the reasons for revocation, the effective date and consequences of the revocation. In case of an unregistered PoA it is advisable that the party also issues a public notice in local newspapers. The third party, if any, is further required to be put to notice.

In case of a registered deed of PoA, the party must register the deed for cancellation/revocation after preparing the cancellation deed which must again state the reasons for revocation, the effective date and consequences of the revocation. The principal is then required to serve the copy of the cancellation deed to the agent/attorney. In case of registered PoA also, one is advised to make a newspaper publication of such cancellation.

The aspect of cancellation is crucial since the veracity of documents executed by an agent on the strength of the PoA come into question on the ground of him not having a valid PoA because of alleged termination/cancellation of PoA before the time when the agent executed such document.

The issue regarding the revocation of a registered PoA was addressed most recently in Amar Nath v. Gian Chand [2022 SCC OnLine SC 102] by the Hon’ble Apex Court. In the said matter the plaintiff had executed a special power of attorney in favour of the Defendant No. 2 for the sale of plaintiff’s property in favour of Defendant No. 1. The Defendant No. 1 was not in a position to arrange for money. Therefore, Defendant No. 2 surrendered the original power of attorney to the plaintiff and the plaintiff drew a cut line on it and wrote ‘cancelled’. He also told Defendant No. 1 that the same stood cancelled. Subsequently, Defendant No. 2, allegedly in collusion with Defendant No. 1, applied for the copy of the power of attorney, and fraudulently executed the sale deed in between themselves for a consideration of Rs. 30,000/-. The mutation was also sanctioned. On becoming aware of it, the plaintiff challenged the sale deed by filing a suit for declaration by way of permanent injunction mainly on the grounds firstly that the Defendant No. 2, during the registration of the sale deed, could not have produced the original PoA before the registering officer under Registration Act and secondly, the sale deed was executed without authority since special power of attorney was deemed to have been cancelled.

The lower courts declined the relief sought by the plaintiff.  The High Court proceeded to set aside the findings of the lower courts and held that the mutation showing the sale in favour of the Defendant no. 1 was null and void. The High Court relied on Section 18A of the Registration Act and held that it was necessary for the Registering Authority to see the true copy of the special power of attorney. Since original power of attorney was cancelled, the same could not be relied upon by the Registering Authority for the purpose of execution of the sale deed.

The Apex Court in the very beginning observed that Section 18A contemplates the production of a true copy of a document which is sought to be registered. In the present case it was the sale deed which was to be registered and the production of the sale deed is not in question. The Court then went on to analyse the applicability of other provisions under section 32, 33 and 34 of the Registration Act and held that there was a certified copy of power of attorney which authorised Defendant No. 2 and if it was not cancelled (as per law) and he had executed the sale deed, he is within his rights to present the documents before the registering officer. Further, the duty of the Registering Officer extends only to enquire and find that such person is the person who has executed the document he has presented and further be satisfied about the identity of the person. On the contention of the plaintiff that original power of attorney was cancelled by cutting it and writing on it ‘cancelled’ and thus Defendant No. 2 had no authority thereafter, the Court, in this regard, observed that the power of attorney was registered. The plaintiff neither did get the power of attorney cancelled at the Sub-Registrar Office nor did he send any notice of cancellation. The Court clarified that “This we say as even in the absence of a registered cancellation of the power of attorney, there must be cancellation and it must further be brought to the notice of the third party at any rate as already noticed.” Therefore, the making of a cancellation deed, its registration as well as notice to the donee/agent/power of attorney holder are equally essential for a valid revocation of power of attorney.

[1] State of Rajasthan v. BasantNahata, (2005) 12 SCC 77]

[2] It was held in A.C. Narayanan v. State of Maharashtra, (2014) 11 SCC 790 that “The power-of-attorney holder is the agent of the grantor. When the grantor authorises the attorney holder to initiate legal proceedings and the attorney holder accordingly initiates such legal proceedings, he does so as the agent of the grantor and the initiation is by the grantor represented by his attorney holder and not by the attorney holder in his personal capacity…However, we make it clear that the power-of-attorney holder cannot file a complaint in his own name as if he was the complainant. In other words, he can initiate criminal proceedings on behalf of the principal.”

[3] Suraj Lamp and Industries Private Limited vs. State of Haryana & Anr. (2012) 1 SCC 656

[4] Church of Christ Charitable Trust & Educational Charitable Society v. Ponniamman Educational Trust, (2012) 8 SCC 706

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Power of Courts to Remand the Matters to Arbitral Tribunal

Arbitration

As per the Arbitration and Conciliation Act, 1996, when an application under section 34 of the 1996 Act is moved by the Award Debtor along with the application for remitting the matter to the Arbitrator, the only power invested in the Court is to adjourn the proceedings for the limited purpose mentioned in Section 34(4) of the 1996 Act. As per the Section 34(4), the Court can defer the hearing of the objection filed under Section 34 on a written request made by a party to enable the Arbitral Tribunal to resume the arbitral proceedings so that the grounds for setting aside or in other words, the deficiencies in the arbitral award may be eliminated by the Arbitral Tribunal. The matter cannot be remanded for fresh decision by the Arbitral Tribunal which has become functus officio.

The law has also been laid in clear terms in the matter of McDermott International Inc. v. Burn Standard Co. Ltd. [(2006) 11 SCC 181]. In the matter of Radha Chemicals v Union of India [Civil Appeal No. 10386 of 2018] it was once again laid down that “the court while deciding a Section 34 (Arbitration and Conciliation Act, 1996) petition has no jurisdiction to remand the matter to the Arbitrator for a fresh decision”. The issue has been addressed in the matters of Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. (2018) 11 SCC 328 wherein it was held that objective behind section 34(4) is to make the award enforceable and in Som Datt Builders Limited v. State of Kerala (2009) 10 SCC 259 wherein the Court held that in view of Section 34(4) of the Act, the High Court ought to give the Arbitral Tribunal an opportunity to give reasons, if the same have not been given in the original arbitral award.

Recently, in the matter of Dr. A. Parthasarathy & Ors v. E Springs Avenues Pvt. Ltd &Ors.  [SLP (C) Nos. 1805-1806/2022], the Hon’ble Supreme Court dealt with an impugned order wherein the High Court, in exercise of power under Section 37 of the 1996 Act, had set aside the award passed by the learned Arbitrator and has remanded the matter to the Arbitrator for fresh decision. While deciding the issue, the Hon’ble Supreme Court wholly relied upon its decisions in Kinnari Mullick and Anr. Vs. Ghanshyam Das Damani (2018) 11 SCC 328 and I-Pay Clearing Services Pvt. Ltd. Vs. ICICI Bank Ltd. (2022) SCC OnLine SC 4. The Court held that the High Court under section 37 of the 1996 Act either may refer the parties for fresh arbitration or may consider the appeal on merits on the basis of the material available on record within the scope and ambit of the jurisdiction under Section 37 of the 1996 Act. The Court clarified that the High Court does not have the jurisdiction to remand the matter to the same arbitrator for fresh decision/arbitration. This is otherwise permissible only by the consent of both the parties that the matter be referred to the same arbitrator.

In the Kinnari Mullick the Hon’ble Supreme Court elaborately discussed various aspects of power to remand the matter – when can the matter be remanded, what is the objective of remand and what are the limitations to the power in the light of provision under section 34(4) of the 1996 Act. The central issue involved in the case was whether Section 34(4) of the Arbitration and Conciliation Act, 1996 empowers the Court to relegate the parties back before the Arbitral Tribunal after having set aside the arbitral award in question. Additionally, it was also determined whether the court can exercise the power in absence of any specific application/prayer of the parties in this regard.

In Kinnari Mullick the award was challenged by the appellants and was set aside on the ground that it is devoid of any reasons for its findings. On appeal, the decision of the Single Bench of the Hon’ble High Court was affirmed. The Division Bench additionally suo moto decided to remand the matter back before the Ld. Arbitral Tribunal directing the Ld. Tribunal to provide reasons in support of the findings. The said part of the decision of the Division Bench was challenged before the Supreme Court.

Adverting to Section 34(4) of the 1996 Act, the Court observed that the Court can defer the hearing of the application filed under Section 34 only on a written request made by a party so that the grounds for setting aside or in other words, the deficiencies in the arbitral award may be eliminated by the arbitral tribunal. The Court cannot ive a direction suo moto. The Court added that “The quintessence for exercising power under this provision is that the arbitral award has not been set aside.” In other words, even a party cannot move an application under section 34(4) of the 1996 Act once the award has been set aside by the court. The Court explained that this is because consequent to disposal of the main proceedings under Section 34 of the 1996 Act, the Court would become functus officio.

In the matter of I-Pay Clearing, the appellant, along with the application under section 34, moved an application under section 34(4) seeking directions to adjourn the proceedings for a period of three months and direct the learned Arbitrator to issue appropriate directions with regard to an issue where the Arbitrator had failed to give its findings. The main objection was filed on the ground that the Arbitrator has failed to record detailed reasons for its findings and thus, the same is patently illegal and erroneous. The High Court dismissed the application under section 34(4) of the 1996 Act on the ground that the defect in the arbitral award is not curable. The appellant preferred an appeal before the Hon’ble Supreme Court against the said order of dismissal of application under section 34(4) of the 1996 Act.

The Court explained that there is a difference between a finding and reasons. Findings are the decision on an issue. Reasons are the links between the materials on which certain findings are based and the actual findings. Section 34(4) of the Act, can be resorted to record reasons on the finding already given in the award or to fill up the gaps in the reasoning of the award. However, when prima facie it is case of patent illegality, as was pleaded by the respondent also, the same is required to be considered by the Court itself. Further, the Court has discretion to decide on the question as to whether a good case has been made out for relegating the parties back to the arbitral tribunal under section 34(4) of the 1996 Act i.e. showing that “there is inadequate reasoning or to fill up the gaps in the reasoning, in support of the findings which are already recorded in the award”. It is not obligatory on the Court to remit the matter in all the cases where party makes an application. The Court further clarified that, “If there are no findings on the contentious issues in the award or if any findings are recorded ignoring the material evidence on record, the same are acceptable grounds for setting aside the award itself…. A harmonious reading of Section 31, 34(1), 34(2A) and 34(4) of the Arbitration and Conciliation Act, 1996, make it clear that in appropriate cases, on the request made by a party, Court can give an opportunity to the arbitrator to resume the arbitral proceedings for giving reasons or to fill up the gaps in the reasoning in support of a finding, which is already rendered in the award.” Therefore, we may conclude that the law is more than settled as to the limited purpose for which and in limited circumstances in which a matter may be relegated to the Arbitral Tribunal by the Court exercising its discretionary jurisdiction under section 34(4) of the 1996 Act on application moved by a party in this regard. Needless to say this is different from the power of the Arbitral Tribunal to correct the award under section 33 of the 1996 Act and to make an additional award under section 33(4) of the 1996 Act where the parties can move an application directly before the Arbitral Tribunal and seek an appropriate remedy.

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Vicarious Criminal Liability of a Partner When the Partnership Firm is Not an Accused Tried for the Primary/Substantive offence under Negotiable Instrument Act

Criminal Law, Negotiable Instruments

In the matter of Dilip Hariramani v. Bank of Baroda [Criminal Civil Appeal No. 767 of 2022 decided on 09.05.2022, a partner of the partnership firm challenged his conviction under section 138 read with section 141 of the Negotiable Instruments Act, 1881. He was made accused on account of dishonor of cheque issued by the authorized signatory of the firm for repayment of loan availed by the partnership firm. In the complaint filed by the Bank under Section 138 of the NI Act, the partner of the firm and the authorized signatory were made parties/accused while the firm was not. The accused partner along with the authorized signatory were convicted under Section 138 of the NI Act and sentenced to imprisonment for six months. They were also asked to pay compensation under Section 357(3) of the Code of Criminal Procedure, 1973. If they faltered, they were to suffer additional imprisonment. The appellate Court enhanced the compensation amount under Section 357(3) with the stipulation that the appellant partner and the authorized signatory shall suffer additional imprisonment for three months in case of failure to pay.

An important question arose for consideration of the Hon’ble Supreme Court – “whether a partner can be convicted and held to be vicariously liable when the partnership firm is not an accused and is not being tried for the primary/substantive offence”.

The Court analysed the provision under section 141 of the NI Act. The section has been reproduced herein below:

“141. Offences by companies.—(1) If the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence.

Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this chapter.

(2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attributable to, any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation.—For the purposes of this section,— (a) “company” means any body corporate and includes a firm or other association of individuals; and (b) “director”, in relation to a firm, means a partner in the firm.

The Court observed that expression ‘every person’ is wide and comprehensive, however, such person should also be in charge of and responsible to the company for the conduct of its business for being liable under the section. The initial onus and burden is on the prosecution to first establish the requirements of sub-section (1) to Section 141 of the NI Act.

The Court referred to the case of State of Karnataka v. Pratap Chand and Others (1981) 2 SCC 335 wherein the complaint against the firm and the partners was made under Section 34 of the Drugs and Cosmetics Act which is pari materia to Section 141 of the NI Act. The Court in the said matter quashed the conviction of the partner of the firm on the ground that he could not have been convicted merely because he had the right to participate in the firm’s business as per the partnership deed. The Court clarified that a partner is not vicariously liable for an offence committed by the firm, unless “he was in charge of, and was responsible to, the firm for the conduct of the business of the firm or if it is proved that the offence was committed with the consent or connivance of, or was attributable to any neglect on the part of the partner concerned.” The Court had in the case relied on the judgment in G.L. Gupta v. D.H. Mehta (1971) 3 SCC 189 wherein the expression ‘in-charge’ was explained stating that “It seems to us that in the context a person ‘in-charge’ must mean that the person should be in overall control of the day to day business of the company or firm. This inference follows from the wording of Section 23-C(2). It mentions director, who may be a party to the policy being followed by a company and yet not be incharge of the business of the company. Further it mentions manager, who usually is in charge of the business but not in overall charge. Similarly the other officers may be in charge of only some part of business”. The complaint in this case was filed under Section 23-C of the Foreign Exchange Regulation Act, 1947 which was parti materia with Section 34 of the Drugs and Cosmetics Act.

The Court further referred to National Small Industries Corporation Limited v. Harmeet Singh Paintal and Another (2010) 3 SCC 330, the judgment that summarized the law under section 141 of the NI Act. The Court in the case had laid down that “Section 141 does not make all the Directors liable for the offence. The criminal liability can be fastened only on those who, at the time of the commission of the offence, were in charge of and were responsible for the conduct of the business of the company.” It was further explained that “Vicarious liability can be inferred against a company registered or incorporated under the Companies Act, 1956 only if the requisite statements, which are required to be averred in the complaint/petition, are made so as to make the accused therein vicariously liable for offence committed by the company along with averments in the petition containing that the accused were in charge of and responsible for the business of the company and by virtue of their position they are liable to be proceeded with.”

The Court in the present matter once again applied the precedents laid down by it and ruled that “the appellant cannot be convicted merely because he was a partner of the firm which had taken the loan or that he stood as a guarantor for such a loan. The Partnership Act, 1932 creates civil liability. Further, the guarantor’s liability under the Indian Contract Act, 1872 is a civil liability. The appellant may have civil liability and may also be liable under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. However, vicarious liability in the criminal law in terms of Section 141 of the NI Act cannot be fastened because of the civil liability. Vicarious liability under sub-section (1) to Section 141 of the NI Act can be pinned when the person is in overall control of the day[1]to-day business of the company or firm. Vicarious liability under sub-section (2) to Section 141 of the NI Act can arise because of the director, manager, secretary, or other officer’s personal conduct, functional or transactional role, notwithstanding that the person was not in overall control of the day-to-day business of the company when the offence was committed. Vicarious liability under sub-section (2) is attracted when the offence is committed with the consent, connivance, or is attributable to the neglect on the part of a director, manager, secretary, or other officer of the company.”

The Court observed that in the present matter the initial legal notice was issued only to the authorized signatory. The complaint was filed against the authorized signatory and the partner who was the appellant. The Firm was neither accused nor summoned to be tried. In this background the Court referred to Dayle De’souza v. Government of India through Deputy Chief Labour Commissioner (C) and Another 2021 SCC OnLine SC 1012 (), State of Madras v. C.V. Parekh and Another (1970) 3 SCC 491 (wherein the complaint was filed under Section 10 of the Essential Commodities Act and the Court held rejected the argument that persons in charge of were responsible on the ground that it ignores the first condition for the applicability of Section 10 that the person contravening the order must be a company itself), Sheoratan Agarwal and Another v. State of Madhya Pradesh (1984) 4 SCC 352, Anil Hada v. Indian Acrylic Ltd. (2000) 1 SCC 1 and finally Aneeta Hada v. Godfather Travels and Tours Private Ltd. (2012) 5 SCC 661. In Aneeta Hada, the Court upheld the judgment in C.V. Parekh and confirmed “…for maintaining the prosecution under Section 141 of the Act, arraigning of a company as an accused is imperative.” and clarified that the judgments in Sheoratan Agarwal and Anil Hada are overruled. The Court therefore ruled in unqualified terms that “unless the company or firm has committed the offence as a principal accused, the persons mentioned in sub-section (1) or (2) [of section 141 of NI Act] would not be liable and convicted as vicariously liable.” The judgment in Aneeta Hada, however, laid down one exception and that was when there is a legal bar for prosecuting a company or a firm. Since this plea was neither taken nor application in the present case, the Court proceeded to set aside the conviction of the appellant partner of the firm.

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